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http://ssrn.com/abstract=991352
 
 

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Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets


Ronald J. Gilson


Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Charles K. Whitehead


Cornell Law School


Columbia Law Review, Vol. 108, p. 231, 2008
ECGI - Law Working Paper No. 86/2007
Stanford Law and Economics Olin Working Paper No. 346
Columbia Law and Economics Working Paper No. 302
Boston Univ. School of Law Working Paper No. 07-25
Rock Center for Corporate Governance at Stanford University Working Paper No. 8

Abstract:     
The traditional law and finance focus on agency costs presumes, without acknowledgement, that the premise that diversified public shareholders are the cheapest risk-bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity buying wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to forego, arguably becoming a lower cost substitute for traditional risk capital.

If diversified shareholders are no longer the cheapest risk-bearers, then the associated agency costs may now be voluntary; and, if risk management can substitute for risk capital, without requiring a transfer of ownership, then why go public at all? Do more complete capital markets herald (once again) the eclipse of the public corporation? We offer some preliminary responses, suggesting that the line between public and private firms may begin to blur as the traditional balance between agency costs and the benefits of public ownership shifts towards a new equilibrium. For some, the benefits of public ownership may continue to outweigh the associated agency costs. For others, changes in risk transfer may implicate how a firm is (or should be) governed. The Essay then ends with a final question: If the opportunity to invest in common stock recedes, by what means will former investors in public equity be able to invest capital?

Number of Pages in PDF File: 47

Keywords: agency costs, capital markets, corporate governance, derivatives, LBO, private equity, risk, risk management

JEL Classification: D21, D52, G14, G32, G34, K22, L22

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Date posted: June 6, 2007 ; Last revised: September 29, 2009

Suggested Citation

Gilson, Ronald J. and Whitehead, Charles K., Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets. Columbia Law Review, Vol. 108, p. 231, 2008; ECGI - Law Working Paper No. 86/2007; Stanford Law and Economics Olin Working Paper No. 346; Columbia Law and Economics Working Paper No. 302; Boston Univ. School of Law Working Paper No. 07-25; Rock Center for Corporate Governance at Stanford University Working Paper No. 8 . Available at SSRN: http://ssrn.com/abstract=991352

Contact Information

Ronald J. Gilson
Stanford Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0614 (Phone)
650-725-0253 (Fax)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-1655 (Phone)
212-854-7946 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Charles K. Whitehead (Contact Author)
Cornell Law School ( email )
Myron Taylor Hall
Ithaca, NY 14853
United States
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